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Archive: Aug 2020

  1. Government debt crosses the £2,000,000,000,000 barrier

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    Yes, you did count correctly – there are twelve zeroes after the two. Another month of Government borrowing above £20bn has pushed total Government debt over the £2tn level for the first time.

    The Public Sector Finances data released by the Office for National Statistics (ONS) on Friday were notable mainly for that £2tn figure. It is no surprise, given that the June figure for public sector net debt (PSND) was £1.983.8tn, but moving from £1. something to £2. something makes good headlines. In reality, the July numbers were slightly better – or perhaps that should be not as bad – as had been expected:

    • The public sector net borrowing requirement (PSNBR) in July 2020 is estimated to have been £26.7bn, against a £1.6bn surplus a year ago (July tax receipts are usually boosted by payments on account). Although the monthly borrowing was the fourth highest on record since records started in 1993, there is some solace that it was slightly less than the Office for Budget Responsibility (OBR)’s central scenario projection of £28.4bn and the market’s average estimate of £28.6bn.
    • For the first four months of this financial year, total borrowing amounted to £150.5bn. The ONS has reworked last month’s statement to say that this cumulative figure is ‘£128.4bn more than in the same period last year and the highest borrowing in any April to July period on record (records began in 1993), with each of the months from April to July being records’. However, there is an element of good news from the OBR: as the graph above shows, the £150.5bn figure is £28.7bn below the OBR’s central scenario projection. Unfortunately, about £13bn of that difference is attributable to a difference in accounting approaches to the various Government-backed loan schemes. The OBR allows for projected write-offs – hence increase debt – while the ONS is still in the process of incorporating these in its data.
    • The uncertainty of the initial estimates for monthly borrowing figures was again underlined, with the April-June figures revised downby a cumulative £4.1bn. The ONS attributes the drop largely to “stronger than previously estimated tax receipts and National Insurance contributions”.
    • Overall Government debt rose to £2,004.0bn, £227.6bn (12.8%) higher than a year ago. As a percentage of UK GDP debt rose to 100.5% in July: a year ago it was 80.1%. Revisions to earlier data in 2020 mean that the ONS now says July 2020 marks “the first time [the ratio] has been above 100% since the financial year ending (FYE) March 1961’.
    • Self-assessed income tax receipts were £4.8bn in July 2020, £4.5bn (48%) less than in July 2019, because of the option given to defer payments on account until 31 January.

    In the circumstances it is surprising that the reduction was not greater. The OBR had reckoned that 90% of tax due would not be paid. As the OBR hints, those constructively ambiguous words on the HMRC website telling taxpayers “you can still make the payment by 31 July 2020 as normal if you’re able to do so” clearly worked…

    Summary

    Well Apple (The US Tech giant) hit a market cap of $2 trn last week, doubling in valuation in just over two years.  It’s the first publicly traded U.S. company to reach a $2 trillion market cap and Apple was also the first publicly traded U.S. company to reach a $1 trillion market cap….. Maybe a Trillion is the new Million?

  2. S&P 500 at a record high – so should we party like it’s 1999?

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    Where were you at the turn of the millennium? When the dot-com bubble burst?

    Well on Tuesday 18 August, the S&P 500 crept up by 0.23%. It was enough to bring the reading on the index to just above the previous high that it had hit nearly six months previously, on 19 February. In between those two peaks there was a fall of 33.9% to 23 March followed by a rally of 51.5%.

    The obvious question is why? The USA economy today is much less healthy – in all senses – than it was in February. In the second quarter of 2020 US GDP contracted by 9.5%, while the latest unemployment reading is 10.2%. Covid-19 cases are flatlining at around 50,000 per day and there is a Congressional logjam preventing the introduction of a second economic stimulative package to replace the $2.2trn one that expired at the end of July. Throw in for good measure a looming presidential election which the (nominally) Republican incumbent is currently on course to lose and the conditions for a raging bull market appear distinctly absent. So once again, why?

    Here are some plausible answers:

    • Tomorrow, not today – Markets are expressing a view about the future, not the present. Look, say, 18 months out and there could be a Covid-19 vaccine that has allowed ‘normal’ life to resume. En route there will be a jump in economic output, even if it is only to return to 2019 levels.
    • Technology – Comparing the performance of the Dow Jones Index and the S&P 500, the major technology companies have been the driving force of the US market indices since March. Technology has been a major beneficiary of the pandemic as the world has moved online. Five technology stocks – Apple, Microsoft, Amazon, Facebook and Alphabet (aka Google) – top the S&P 500’s constituent list and now represent 21% of the index by value. The FT estimates that this quintet accounts for a quarter of the rally in the index since 23 March.

    Technology’s impact also shows through in the NASDAQ Composite Index, as the above graph illustrates. This has traditionally been heavily weighted to technology shares and is up 25% this year (against 5% for the S&P 500).

    • Interest rates and money – At the start of this year, the 10-year US Treasury Bond offered a yield of 1.92% while the Federal Funds Rate was 1.50%-1.75%. Today the corresponding figures are 0.67% and 0%-0.25%.

    The Federal Reserve, in common with other central banks, has not only made money cheap to borrow, but has also thrown vast quantities of cash into the markets to prevent them locking up. The Fed’s balance sheet has expanded from $4.2trn at the start of the year to just shy of $7trn now.

    The UK for that matter has just exceeded $2trn!

    All other things being equal – a dangerous proviso at the best of times – lower interest rates increase the value of shares because the income they produce is discounted at a lower interest rate. The historic earnings yield on the S&P 500 is now 3.43% against 4.32% at the start of the year.

    • FOMO Fear-of-missing-out (FOMO) is playing its part in the rally. The USA has seen a jump in interest from retail investors, helped by a move to zero commission rates late last year. According to one report, retail investors now account for about 20% of market activity – and nearly 25% on peak days – against an average of 10% in 2019.

    Summary

    Tuesday’s peaks for the S&P 500 and NASDAQ prompted a number of comments from those who remember the technology boom of 1999. However, this time around the technology companies in focus are making money, not burning it.